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The Truth Behind iQIYI, Inc’s Multibagger Potential

China internet stocks are hot. The likes of Alibaba Holdings Ltd (NYSE:BABA), Tencent Holding/ADR (OTCMKTS:TCEHY), Baidu Inc (ADR) (NASDAQ:BIDU) and others have rallied well over 100% over the past several years. But, as noteworthy as these stocks may be, iQIYI, Inc (NASDAQ:IQ) is one freshly public Chinese internet stock that has staged a 100%-plus rally in a much shorter time frame, and it is arguably the most talked about Chinese internet stock today.

A part of the Baidu umbrella, iQIYI is a live-streaming video platform that is referred to by many to as the “Netflix, Inc. (NASDAQ:NFLX) of China.” Considering the robust of nature of Netflix’s growth in the live-streaming video market, investors are naturally extrapolating such huge growth prospects to IQ stock.

That is why after going public at $18 in late March, IQ stock is now trading at nearly $35.

After such a huge rally, the natural question is: what comes next for IQ stock?

I think more upside; iQIYI does look just like an early stage Netflix with huge user growth and massive losses thanks to original content production costs. But just as Netflix has leveraged scale to drive profit margins into positive and growing territory, iQIYI will do the same alongside robust growth in the huge and largely untapped Chinese live-streaming market.

From this perspective, I think IQ stock could be a multibagger over the next several years.

Here’s a deeper look.

iQIYI Is the Netflix of China

No matter which way you look at it, you can’t ignore the very obvious similarities between Netflix and iQIYI.

Neither are the only the player in their addressable live-streaming video markets. Netflix has major competitors in the form of Amazon.com, Inc. (NASDAQ:AMZN) and Facebook Inc (NASDAQ:FB); iQIYI has major competitors in the form of Tencent and others.

But both Netflix and iQIYI are the biggest players in their space. Netflix has 125 million subscribers. iQIYI has 60 million subscribers. Both of those marks are untouched by competitors.

Also, both Netflix and iQIYI are exclusively live-streaming video companies, while their competitors are multi-faceted tech giants with a live-streaming video arm. That gives Netflix and iQIYI a specialization and resource allocation advantage, which is big when it comes to original content.

Indeed, one of the biggest differentiating factors for both Netflix and iQIYI is each platform’s robust original content slate. This original content has been a big driver of out-sized user growth for Netflix and iQIYI over the past several years.

Thus, it is pretty easy to see that iQIYI is indeed the Netflix of China. That comparison comes with lofty growth expectations, and rightly so.

IQ Stock Has Multibagger Potential

Over the next several years, I realistically see IQ stock easily doubling in value.

IQ’s addressable market is really big, and Chinese regulation prohibits it from being overcrowded with international competitors. China has roughly 800 million internet users, and that number is rapidly growing. Meanwhile, the average household size in China is roughly 3.1, implying that IQ’s addressable market is roughly 260 million internet households in China.

How much of that market can IQ grab?

In the U.S., Netflix has 57 million and growing subs in a 110 million internet household market (287 million internet users and average household size of 2.6). That is over 50% market share. Considering lack of viable competition in China, IQ should easily be able to grab 50% market share or more.

Therefore, IQ stock has clear runway to 130 million or more users over the next several years.

How much will each of those users be worth?

Netflix is worth $155 billion today. Its total user base stands at 125 million. Thus, each user on Netflix is valued at $1,240.

Each user on IQ will be valued significantly less because Netflix has global growth potential; whereas, IQ has growth potential limited to China. The global internet user addressable market — excluding China — is roughly 3.3 billion users versus 800 million for China, so it’s about four-times as big. Thus, Netflix’s unit user value should be roughly four-times as large as IQ’s unit user value.

That implies each user on IQ should be worth around $310. On a 130 million user base, that implies a valuation for IQ stock of over $40 billion, versus $25 billion today.

Bottom Line on IQ Stock

IQ stock has huge growth potential over the next several years as the company becomes the Netflix of China. Considering the size of China’s internet market, the secular growth prospects of live-streaming video, and the relatively reduced valuation of IQ, I think IQ stock could be a multibagger over the next several years.

As of this writing, Luke Lango was long BABA, TCEHY, BIDU, IQ, AMZN, and BABA.